I do not live in Westminster, but I declare an interest in its parking policy. At evenings and weekend I drive to the gilded city regularly, regarding the libertarian freedom to park as a boon and a blessing to life in London. It is an asset alike to West End businesses, visitors and those who work unsocial hours. It leads to no noticeable gridlock. It causes no harm.

As of next January the policy is dead – and for reasons of greed, hypocrisy and fiscal distortion reaching far beyond the boundaries of that city. Single yellow lines will be effectively doubled at all hours. Car-borne visitors and workers in restaurants and theatreland must pay at a meter or find an off-street car park. Westminster has lost some £10m in fines from the advent of its admirable meter texting service, and wants to recoup it somehow.

Parking fines are big money. For most of the past decade Westminster has raised more from parking on its streets than it has from council tax. It is a parking corporation (privatised to a company called NSL) with a local council attached. Its home guard is composed of traffic wardens, who outnumber police on the streets. Its eyes are hundreds of CCTV cameras, marking every illegal U-turn or lane violation. And since the tap can be turned on without any by-your-leave from Whitehall, the temptation to raise ever more money is irresistible, especially as in Westminster most of the victims are unlikely to be residents or voters. Many residents hanker after the days when theirs was a quiet, salubrious court suburb. Anything that drives away outsiders, especially tourists, is fine by them.

So far, so selfish. City centres depend increasingly on out-of-hours leisure business, and even in London this is now walking a fine line between solvency and collapse. It is hard to imagine a better route to collapse than to load restaurants and entertainments with new labour costs and inconvenience. Westminster may be rich, but its businesses and their workers are not, nor are all its visitors, even those who come by car. There is no way that meters and off-street parking can make up for the loss of thousands of single-yellow line spaces.

A cardinal reason for Westminster's action is that cars in some shape or form are the chief source of its surplus revenue, indeed almost the only one unregulated by the government. The reason is that parking charges are supposedly to relieve congestion, not to raise general revenue. Yet today charges and fines cover almost a third of the city's annual £250m expenditure and are the one area of income not governed by government capping and regulation.

Cuts in central grants to meet national budget targets would, in most countries, be partly eased by local taxation. Local voters might choose to be taxed locally to keep their libraries, school visits, swimming pools and sports grounds. Successive cabinets have sought to court political gain by "capping" such taxes, whatever voters want. Central tax and spend can rise inexorably (and still does) but local taxes are held down by order. Local tax capping is the "fiscal union" that George Osborne wants to see Brussels impose on the eurozone states.

There is one quarry for which the fiscal hunting season is always open, and that is parking – and councils have been unable to resist. Drivers in the capital have come to regard the fining regime as licensed mugging. A two-minute overstays incurs a fine of between £40 and £60, and tow-away charges start at some £350, swiftly rising to the point where recovering a car after a week's holiday can cost more than the holiday. The reason is simple. For local councils this is easy money, with no accountability to electors.

These are exactly the ministers who are imposing cuts on local councils and yet refusing to let them increase local taxes to alleviate the pain. They know perfectly well that parking is the one domain remaining to local discretion. Paying to occupy a few metres of urban streets is a tax by any other name, but unlike taxes on occupied property it is not restricted by the Treasury.

Such a craze for central control is seriously distorting public finance. Local taxes in Britain are among the lowest in the world, both in number and scale and, because capped, are steadily shrinking. Government's obsession with seeking credit for stopping them going up leads to the absurdity that rich Westminster's top tax band this year is £1,375, while the equivalent rate in Gwynedd, Wales, is £2,900. Property taxes in New York vary with property values at the top end, and can be 10 times as much.

When there is supposedly a housing shortage, it is ridiculous not to allow the tax system to act as an incentive to use living space efficiently. London has the most graceful, some might say lavish, residential property in Europe. Westminster's wealthy residents, thousands of whom pay little or no income tax, pay no more than nominal property tax on what is famously the most easily taxable of assets – their houses. Any house worth more than £320,000 is charged the same. Huge sums of possible revenue are simply going begging by the failure to revalue the top bands.

Government turns instead to motorists. Drivers are fit for Morton's fork: anyone who can afford to drive is assumed to be able to pay ever more. Petrol taxes no longer bear any relation – as once – to road-building but are treated by the Treasury as like cigarette taxes, as a punishment for evil-doing. The rationing of road space is by congestion. Predicting and then meeting forecasts of need may guide policy on railways or airports, houses or hospitals, but not roads. They are treated as a sinful luxury, and driving and parking cars on them even more so. Ministers allow councils to levy charges on them with impunity, and then attack those who do so. Hypocrisy.